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Market Analysis
Number of firms.
Industry concentration.
Technological and cost conditions.
Demand conditions.
Ease of entry and exit.
Conduct
Pricing.
Advertising.
R&D.
Merger activity.
Performance
Profitability.
Social welfare.
number of firms
freedom of entry to industry
nature of product
nature of demand curve
perfect competition
monopoly
monopolistic competition
oligopoly
number of firms
freedom of entry to industry
nature of product
nature of demand curve
perfect competition
monopoly
monopolistic competition
oligopoly
Perfect Competition
Assumptions
firms are price takers
freedom of entry
identical products
perfect knowledge
MC
D = AR
= MR
AR
AC
Pe
D
O
O
Q (millions)
(a) Industry
AC
Qe
Q (thousands)
(b) Firm
AC
P1
AC
MC
D1 = AR1
AR1
= MR1
D
O
O
Q (millions)
(a) Industry
Qe
Q (thousands)
(b) Firm
Perfect Competition
Assumptions
MC = S
a
P1
P2
b
c
P3
D1 = MR1
D2 = MR2
D3 = MR3
D1
D3
O
Q (millions)
(a) Industry
D2
O
Q (thousands)
(b) Firm
Perfect Competition
Long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR
S1
Se
LRAC
P1
AR1
D1
PL
ARL
DL
D
O
O
Q (millions)
(a) Industry
QL
Q (thousands)
(b) Firm
(SR)MC
competition
(SR)AC
LRAC
DL
AR = MR
Perfect
Competition
Benefits of perfect competition
price equals marginal cost
prices kept low
firms must be efficient to survive
Perfect competition
The market demand and supply equations for Plywood are given by
Qs = 20,000 + 30P
Qd = 40,000 20P
1.Determine the equilibrium price and quantity
The Plywood industry is perfectly competitive, and the marginal cost
equation for one firm, Greenply,is given by
MC = 200 + 4Q
2.What is the short-run output rate for Greenply?
Average Cost is given by
AC= 1000/Q +200 + 2Q
4.In the short-run , how much economic profit will the firm earn?
Qd = 10,000 4P
Qs = 2,000 + 6P
If the government imposes a excise tax of
Rs.100 per unit, what will be the new
equilibrium price? What is the proportion of tax
shared by the producers and consumers
Monopoly
Defining monopoly
Barriers to entry
economies of scale
economies of scope
product differentiation and brand loyalty
lower costs for an established firm
ownership/control of key factors
ownership/control over outlets
legal protection
mergers and takeovers
aggressive tactics
Features
Single seller
No close substitutes
Entry is blocked
No difference between firm and industry
Price discrimination
Downward sloping demand curve( less elastic)
Monopoly
The monopolists demand curve
downward sloping
MR below AR
Profit
maximising under
MC monopoly
MR
O
Qm
Monopoly
The monopolists demand curve
downward sloping
MR below AR
Profit
maximising under
MC monopoly
AC
AR
AC
AR
MR
O
Qm
Monopoly
The monopolists demand curve
downward sloping
MR below AR
Profit
Measuring profit
Profit
maximising under
MC monopoly
Total profit
AC
AR
AC
AR
MR
O
Qm
Monopoly
The monopolists demand curve
downward sloping
MR below AR
Profit
Measuring profit
Supernormal profit can persist in long run
Monopoly
Disadvantages of monopoly
high prices / low output: short run
curve
MC
Monopoly
P1
AR = D
MR
O
Q1
curve
MC ( = supply under
perfect competition)
Comparison with
Perfect competition
P1
P2
AR = D
MR
O
Q1
Q2
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly
economies of scale
curves
MCmonopoly
P1
AR = D
MR
O
Q1
MC ( = supply)perfect competition
curves
MCmonopoly
P2
P1
P3
AR = D
MR
O
Q2
Q1
Q3
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly
economies of scale
profits can be used for investment
Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly
economies of scale
profits can be used for investment
high profits encourage risk taking
Monopoly Control
Promoting competition
Government Regulation
Public Ownership
Legal Action
Fiscal Measures
Promotion of Co-operation
Publicity Drive
Consumer Awareness
Monopolistic Competition
Assumptions of monopolistic
competition
Easy Entry
Product differentiation
Selling costs
MC
AC
Ps
ACs
AR D
MR
O
Qs
Monopolistic Competition
Assumptions of monopolistic
competition
Equilibrium of the firm
short run
long run
LRMC
LRAC
PL
ARL DL
MRL
O
QL
Monopolistic Competition
Assumptions of monopolistic
competition
Equilibrium of the firm
short run
long run
underutilisation of capacity in the long
run
monopolistic
competition
LRAC
P1
P2
DL under perfect
competition
DL under monopolistic
competition
O
Q1
Q2
Monopolistic Competition
Assumptions of monopolistic
competition
Equilibrium of the firm
short run
long run
underutilisation of capacity in the long
run
Non-price competition
Monopolistic Competition
Assumptions of monopolistic
competition
Equilibrium of the firm
short run
long run
underutilisation of capacity in the long run
Non-price competition
The public interest
Monopolistic Competition
Assumptions of monopolistic competition
Equilibrium of the firm
short run
long run
underutilisation of capacity in the long run
Non-price competition
The public interest
comparison with perfect competition
Monopolistic Competition
Assumptions of monopolistic competition
Equilibrium of the firm
short run
long run
underutilisation of capacity in the long run
Non-price competition
The public interest
comparison with perfect competition
comparison with monopoly
Oligopoly
Key features of oligopoly
barriers to entry
interdependence of firms
barriers to entry
interdependence of firms
Competition versus collusion
Collusive oligopoly: cartels
Cartels
A cartel is formal organisation of producers of a
commodity. Its purpose is to coordinate the
policies of the member firms so as to increase
profits. Cartels are illegal
Centralised cartels ( allocate output and profit
or agreeing on price)
Market sharing Cartels ( each firm operates
only in one area)
Oligopoly
Tacit collusion
price leadership:
dominant Price leadership
Barometric Price leadership
Oligopoly
Tacit collusion
price leadership: dominant firm
price leadership: barometric
Kinked
demand for a firm under
oligopoly
Current price
and quantity
give one point
on demand curve
P1
Q1
Kinked
demand for a firm under
oligopoly
D
P1
D
O
Q1
Oligopoly
Non-collusive oligopoly: the kinked
demand curve theory
Assumptions of the model
1.
If a firm raises prices, other firms wont follow and the firm loses a lot
of business. So demand is very responsive or elastic to price increases.
2.
If a firm lowers prices, other firms follow and the firm doesnt gain
much business. So demand is fairly unresponsive or inelastic to price
decreases.
stable prices
demand
curve
MC2
MC1
P1
D AR
b
O
Q1
MR
Oligopoly
Non-collusive oligopoly: the kinked
demand curve theory
assumptions of the model
stable prices
limitations of the model
Oligopoly
Non-collusive oligopoly: the kinked
demand curve theory
assumptions of the model
stable prices
limitations of the model
Oligopoly
Non-collusive oligopoly: the kinked
demand curve theory
assumptions of the model
stable prices
limitations of the model
Oligopoly
Non-collusive oligopoly: the kinked
demand curve theory
assumptions of the model
stable prices
limitations of the model
Cost of production
Demand and competition
Consumers Psychology
Government policy
Nature of market
Objectives of Pricing
Survival
ROI
Service
Profit Maximization
Sales Maximization
Market Share
Competition
Market leader
Methods of Pricing
Loss-leader pricing
Limit pricing
Transfer pricing
Peak-load pricing
Two-part tariff
Price Discrimination
Meaning of price discrimination
First degree
Second degree
Third degree (the most common form)
Third-degree
price discrimination
P
Revenue from
a single price
P1
200
Third-degree
price discrimination
P
Increased revenue
from price
discrimination
A higher
discriminatory
price is now introduced
P2
P1
150
200
Price Discrimination
Meaning of price discrimination
First degree
Second degree
Third degree (the most common form)
Price Discrimination
Meaning of price discrimination
First degree
Second degree
Third degree (the most common form)
Price Discrimination
Profit maximising prices and output
under price discrimination
DY
DX
O 1000
MRY
O
MRX
(a) Market X
2000
(b) Market Y
MRT
O
3000
(c) Total
(markets X + Y)
Price Discrimination
Profit maximising prices and output
under price discrimination
Price discrimination and the public
interest
competition
Price Discrimination
Profit maximising prices and output
under price discrimination
Price discrimination and the public
interest
competition
profits
Price Discrimination
Market 2
P 2 = 10 Q2
MR 1 = 14 4Q1
MR 2 = 10
Using third-degree price discrimination, what are the profitmaximizing prices and quantities in each market? Show that greater
profits result from price discrimination than would be obtained if a
uniform price were used.